XL Insurance Co SE v BNY Trust Company of Australia Limited

Solicitors: Moray & Agnew Lawyers (Appellant) HWL Ebsworth (First Respondent) Mony De Kerloy Barristers & Solicitors (Second Respondent) Mills Oakley (Third Respondent) Hotchkin Hanly Lawyers (Fourth Respondent) File Number(s): 2019/6129 Decision under appeal Court or tribunal: Supreme Court of New South Wales Jurisdiction: Civil Citation: [2018] NSWSC 1938 [2019] NSWSC 84 Date of Decision: 14 December 2018 20 February 2019 Before: Schmidt J File Number(s): 2016/313421

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] HEADNOTE [This headnote is not to be read as part of the judgment] BNY Trust Company of Australia Limited (BNY) made a claim against MMJ Real Estate (WA) Pty Ltd (MMJ), Dennis Volk and Bruce Hosking (together the defendants) for professional negligence arising out of three property valuations undertaken for BNY in 2010. The defendants brought a cross-claim against their insurer, XL Insurance Company SE (XL), after XL declined to indemnify them or to pay their defence costs under a professional indemnity insurance policy issued to MMJ. XL did so in reliance upon exclusion (ix) in an endorsement to the policy. The specified matter in the exclusion was valuations undertaken by or on behalf of the Insured for lenders who were not an Authorised Deposit-Taking Institution (ADI) supervised by the Australian Prudential Regulatory Authority (APRA), "unless" the valuation included a "Prudent Lender Clause" or a clause with materially the same effect. The Supreme Court ordered the separate determination of the questions whether XL was entitled to decline to indemnify the defendants and to pay their defence costs by reason of the operation of exclusion (ix) under the policy. The agreed facts included that BNY was not an ADI; that the valuations issued by MMJ to BNY did not include a prudent lender clause; and that the loss the subject of BNY's claim was not caused by the failure to incorporate a prudent lender clause in the valuations. In December 2018, Schmidt J determined the separate questions in favour of the defendants finding that exclusion (ix) operated only where there was a causal connection established between the "plaintiff's loss" and the absence of a prudent lender clause in the valuations: BNY Trust Company of Australia v MMJ Real Estate (WA) Pty Ltd (No 2) [2018] NSWSC 1938. Final orders, including a declaration, were made by her Honour in February 2019. XL appealed to the Court of Appeal. The principal issues raised on the appeal were: Whether the primary judge erred in her construction of exclusion clause (ix). Whether the primary judge erred in granting declaratory and other final relief when the defendants' liability to BNY had not yet been established. The Court (Gleeson JA, Bell P and Emmett AJA agreeing) allowed XL's appeal and held: As to issue (1): Having identified the competing constructions of the exclusion clause, the proper approach was to test each against the text, context and purpose of the contract: [53]-[54]. In this case, the preferred construction is that exclusion (ix) applies to exclude cover for "Loss" as defined in the policy where the valuation is undertaken by or on behalf of the Insured for a non-ADI lender and the valuation does not include a prudent lender clause: [55]-[60]. The valuations undertaken by MMJ for BNY answered the description of the specified matter in exclusion (ix). XL was entitled to deny indemnity and refuse to pay defence costs by reason of the exclusion under the policy: [109]-[110]. Burns Philp Hardware Ltd v Howard Chia Pty Ltd (1987) 8 NSWLR 642 at 657 (Priestley JA); MetLife Insurance Ltd v RGA Reinsurance Company of Australia Ltd [2017] NSWCA 56 at [100]-[101] (Leeming JA, McColl JA and Emmett AJA agreeing), applied. As to issue (2): Although the issue did not arise, the scope of the declaratory and final relief ordered by the primary judge was too wide. It is not usually appropriate for the courts to make a declaration as to the liability of an insurer to indemnify an insured in circumstances where the liability of the insured to a claimant has not yet been established by judgment: [114]-[117]. AMP Financial Planning Pty Ltd v CGU Insurance Limited (No 2) at [4]-[12] (Heerey J); University of New South Wales v Moorhouse (1975) 133 CLR 1 at 10; [1975] HCA 26; Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 582; [1992] HCA 10; AMP Fire & General Insurance Co Ltd v Dixon [1982] VR 833 at 839-840, applied.

Judgment

1. BELL P: I agree with Gleeson JA.
2. GLEESON JA: The short question raised by this appeal is the proper construction of an exclusion clause in an endorsement to a professional indemnity insurance policy issued to a property valuer.

Overview

1. In the proceedings below, BNY Trust Company of Australia Limited (BNY) made a claim for damages against MMJ Real Estate (WA) Pty Ltd (MMJ), Dennis Volk and Bruce Hosking (together the defendants), relating to three property valuations undertaken for BNY in 2010. Mr Volk was a director and Mr Hosking an employee of MMJ. They were responsible for the production of the valuations given by MMJ to BNY.
2. XL Insurance Company SE (XL) declined to indemnify the defendants or to pay their defence costs under a professional indemnity insurance policy issued to MMJ covering the period 30 June 2016 to 30 June 2017 (the policy). It did so in reliance upon exclusion (ix) in an endorsement to the policy, for valuations undertaken for lenders who were not an Authorised Deposit-Taking Institution (ADI) supervised by the Australian Prudential Regulatory Authority (APRA), "unless" the valuation included a "Prudent Lender Clause" or a clause with materially the same effect (a prudent lender clause). Exclusion (ix) is set out at [18] below.
3. The defendants each filed cross-claims against XL seeking declarations that XL was liable to indemnify them in respect of any liability to BNY and to pay their costs of defending the proceedings.
4. On 13 July 2018, Davies J made orders for the separate determination of certain questions in relation to each cross-claim: BNY Trust Company of Australia Limited v MMJ Real Estate (WA) Pty Ltd [2018] NSWSC 1052. The separate questions were stated in the following terms: Whether [XL] is entitled to decline to: (i) indemnify the [defendant/cross-claimant] on the [First/Second/Third] Cross-Claim ... under Professional indemnity Insurance Policy No. AU00006350EO16A (the Policy) for any "Loss" (as defined in the Policy) (Loss) incurred by the cross-claimant in respect of the Plaintiffs claim against [it/him] in the proceedings; and (ii) to pay "Defence Costs" (as defined in the Policy) (Defence Costs) in relation to that claim, by reason of the operation of clause (ix) of Endorsement 1 to the Policy.
5. The separate questions were decided on the basis of a statement of agreed facts which included: that BNY was not an ADI; that the valuations provided by MMJ to BNY did not include a prudent lender clause; and that the loss the subject of BNY's claim against the defendants was not caused by the failure to incorporate a prudent lender clause in the valuations.
6. By judgment given on 14 December 2018, Schmidt J determined the separate questions in favour of the defendants and gave leave to the parties to bring in short minutes of order reflecting her reasons: BNY Trust Company of Australia Limited v MMJ Real Estate (WA) Pty Ltd (No 2) [2018] NSWSC 1938 (the Judgment).
7. On 20 February 2019, the primary judge formally answered the separate questions in respect of each cross-claim, "No" (Order 1) and made declarations and final orders in favour of MMJ, Mr Volk and Mr Hosking on their cross-claims requiring XL to indemnify the defendants "in accordance with the terms and conditions of the policy for any liability it or he has to the plaintiff in the proceeding" (Orders 2 and 3), and that XL pay the defendants' "Defence Costs" incurred in respect of BNY's claims against them "in accordance with the terms and conditions of the policy" (Order 4). Her Honour also ordered XL to pay BNY's and the defendants' costs of the cross-claims, including the hearing of the separate question and the hearing before Davies J on 26 June 2018 (Order 5): BNY Trust Company of Australia Limited v MMJ Real Estate (WA) Pty Ltd (No 3) [2019] NSWSC 84 (the Relief Judgment).
8. XL has appealed to this Court. For the reasons given below, I consider that XL's appeal should be upheld, the separate questions should be answered "Yes", and consequential orders should be made, including dismissal of the cross-claims.

The agreed facts

1. The agreed facts upon which the separate questions were determined included: 1. XL issued a professional indemnity insurance policy to MMJ for the period 30 June 2016 to 30 June 2017 which consisted of a number of documents: a Policy Wording, a Schedule, various endorsements including Endorsement 1, described as "Valuer's Endorsement 0515 (modified)" (the Endorsement), and a proposal for insurance dated 9 June 2016; 2. On or about 29 November 2010, BNY, by its agent, The Think Tank Group Pty Ltd (the Manager), retained MMJ to provide the valuations; 3. BNY by its agent, the Manager, retained MMJ to provide certain valuations by letters to MMJ dated 29 November 2010. 4. BNY, as lender, entered into two loan agreements as follows: 1. a facility for up to $1,650,000 with Leigh John Kennedy as borrower dated 30 November 2010; and, 2. a facility for up to $1,450,000 with Wayne Allan Houghton as borrower dated 1 December 2010; 1. BNY is not and has never been an ADI supervised by APRA; 2. between about 9 and 10 December 2010, MMJ produced the three valuation reports addressed to the Manager in its capacity as agent for BNY in relation to certain strata lots at Rockingham in Western Australia; 3. the valuations were prepared and signed on behalf of MMJ by Mr Hosking and reviewed and counter-signed by Mr Volk; 4. BNY commenced proceedings against MMJ, Mr Volk and Mr Hosking by statement of claim filed on 20 October 2016; 5. the loss the subject of BNY's claim against MMJ, Mr Volk and Mr Hosking was not caused by their failure to incorporate in the valuation reports a "Prudent Lender Clause" in the terms set out in exclusion (ix).
2. The primary judge also noted that certain matters were not in issue, including that the three valuations were prepared for BNY, the Commonwealth Bank and the Manager, but only the Commonwealth Bank was an ADI: Judgment at [5].

The policy

1. The policy issued to MMJ for the relevant period was a claims made policy with a limit of liability of $5,500,000 for all claims, and an unlimited "Retroactive Date". The relevant parts of the Policy Wording were as follows.
2. The insuring clauses provided: 2 Insuring Clauses 2.1 Professional Liability The Insurer will indemnify the Insured against Civil Liability for any Loss incurred by the Insured in respect of any Claim first made against the Insured and which is notified to the Insurer during the Policy Period arising from the performance of the Professional Services by or on behalf of the Named Insured. 2.2 Defence Costs The Insurer will pay Defence Costs as and when they are incurred by the Insurer or by the Insured with the prior written consent of the Insurer. However, in the event that the Insurer makes any payment on behalf of any Insured under this clause to which it is ultimately determined such Insured is not entitled under this Policy, each such Insured shall repay the Insurer the amount of such payment immediately on demand. (Emphasis in original)
3. It is common ground that MMJ, Mr Volk and Mr Hosking were each an "Insured" under the policy.
4. The definitions in cl 7 of the Policy Wording included: (1) "Loss is defined to mean: compensatory damages and/ or claimant's costs (whether awarded or by settlement with the prior written consent of the Insurer), but shall not include: (i) civil or criminal fines or penalties imposed by law; or (ii) punitive, exemplary, multiple or aggravated damages; or (iii) any amount uninsurable at law; or (iv) any amount for which the Insured is not legally liable or for which there is no legal recourse to any Insured: cl 7.13. (2) "Defence Costs" is defined to mean: any reasonable and necessary fees, costs and expenses resulting solely from … the defence of a Claim … in respect of any Loss that is the subject of indemnity under this Policy …: cl 7.4. (3) "Claim" is defined to mean: any legal proceedings or demand against an Insured compensation": cl 7.3.
5. Clause 5 of the Policy Wording provided a number of general exclusions from the scope of cover, including dishonesty or deliberate conduct, fidelity, insolvency and known claims and inquiries.
6. The Endorsement contained thirteen exclusions from the scope of cover. It is of assistance to reproduce both exclusion (ix) and also exclusions (v) and (vii). The latter have present significance as they were relied upon by the primary judge as support for her construction of exclusion (ix): Endorsement 1 Valuers Endorsement 0515 (Modified) In consideration of the premium, the Policy is amended as follows: The Insurer will not be liable to indemnify the Insured for any Loss, settlement or other payment, or pay any Defence Costs or Inquiry Costs, directly or indirectly arising out of, based upon, attributable to or in consequence of: … (v) any valuation undertaken by, or on behalf of, the Insured by any person who, at the time the valuation was performed: (a) was not a member of the Australian Property Institute or the Royal Institute of Chartered Surveyors (or any successor professional organisation); or (b) was prohibited from undertaking such valuation by reason of their membership status (pursuant to the code of conduct and/or professional standards of the applicable professional organisation); or (c) was not (where required by statute or other regulation) a licensed or registered valuer in the jurisdiction in which the property that was the subject of the valuation was located; … (vii) any valuation for which the Insured failed to: (a) personally inspect and identify the property, plant, machinery or equipment being valued, including the interior of buildings, and recording the relevant measurements; or (b) record proper field and file notes relating to enquiries relative to the basis of the valuation; or (c) append a written disclaimer to the valuation report limiting responsibility for reliance on the report to the addressee; … (ix) any valuation undertaken by, or on behalf of, the Insured for any lender, financier or any other provider of financial security that is not an Authorised Deposit-Taking Institution supervised by the Australian Prudential Regulatory Authority (APRA) unless the following "Prudent Lender Clause" (or a clause with materially the same effect) is included in any such valuation report: "This valuation is prepared on the assumption that the lender as referred to in the valuation report (and no other) may rely on the valuation for mortgage finance purposes and the lender has complied with its own lending guidelines as well as prudent finance industry lending practices, and has considered all prudent aspects of credit risk for any potential borrower, including the borrower's ability to service and repay any mortgage loan. Further, the valuation is prepared on the assumption that the lender is providing mortgage financing at a conservative and prudent loan to value ratio".
7. XL accepted that, but for the application of exclusion (ix), "Loss" incurred by a defendant in respect of BNY's claim against it or him would, if made out, fall within the ambit of the first insuring clause (cl 2.1), and that the defendants' costs and expenses of defending the proceedings, if incurred with XL's consent, would fall within the ambit of the second insuring clause (cl 2.2).

The primary judge's reasons on construction

1. After referring to the applicable principles of construction, about which no complaint is made by any party, the primary judge's analysis commenced by finding, contrary to the parties' submissions, that the introductory words of the Endorsement and the terms of the clauses, including exclusion (ix), are ambiguous: Judgment at [22].
2. Having found ambiguity, the primary judge determined that exclusion (ix) operated only where there was a causal connection established between the "plaintiff's loss" and the absence of a prudent lender clause. At Judgment [23]-[24], her Honour expressed her conclusion as follows: [23] I am satisfied that the proper construction of clause (ix), driven as that must be by its text, read in the context of the endorsement as a whole, including its introductory words and all of the clauses which follow, is that for which the defendants contended. Namely, the endorsement requires that there be a causal link between the absence of the prudent lender clause specified by clause (ix) in the valuation and the loss for which indemnity is sought. [24] I am also satisfied that this construction avoids obvious consequences, both for clause (ix) and other provisions agreed in the endorsement, which in the circumstances of this commercial relationship, it must be accepted, would be so irrational and unjust, that it is unlikely that they were intended by these commercial parties.
3. At Judgment [32], the primary judge referred to the introductory words in the chapeau to the Endorsement and the causal relationship postulated between the matters specified in the various clauses and the "Loss" as defined in the policy, in the following terms: That the introductory words are concerned with losses caused by the matters dealt with in the clauses which follow, in the case of clause (ix), by the failure to include a prudent lender clause in a valuation, is supported by various considerations, the first being that the introductory words themselves are capable of being so read, they being "directly or indirectly arising out of based upon, attributable to or in consequence of". (Emphasis in original.)
4. The primary judge then gave five reasons for her conclusion.
5. First, it was commercially unlikely that the parties intended that MMJ be "required" to include a prudent lender clause in any valuation to a non-ADI lender when it had not been required to do so in the past and where claims could be made in the policy period arising out of valuations pre-dating the negotiation of the policy terms: Judgment at [35]-[36].
6. Second, it was most unlikely that the parties intended that if a valuation, which did not contain a prudent lender clause, was prepared for more than one entity, at least one of which was not an ADI, but which at least one was, all liabilities insured under the policy would be excluded, including in respect of a claim by the ADI: Judgment at [37]-[45].
7. Third, other exclusions in the Endorsement such as exclusion (vii)(c) (which excluded Loss arising from valuations which did not disclaim liability to persons other than the addressee of the valuation) would produce an "exceedingly unlikely outcome", if its operation was not restricted in a manner analogous to the defendants' suggested construction of exclusion (ix): Judgment at [49]-[54].
8. Fourth, whilst exclusion (v)(a) (which excluded Loss arising from valuations undertaken by persons not having certain qualifications) does not support the defendants' construction of exclusion (ix), it helps explain why the introductory words in the exclusion are ambiguous: Judgment at [56]-[58].
9. Fifth, XL's admission as an agreed fact that the absence of a prudent lender clause did not cause "the losses in these proceedings" supported the construction for which the defendants contended because the "difficulty" for which XL contended (being the obvious practical difficulty for the insurer involved proving a causal link between the absence of a prudent lender clause and "Loss") did not exist in this case: Judgment at [59]-[60].

The primary judge's reasons on relief

1. On the further hearing on the question of relief, XL submitted that despite its failure on the cross-claims, no final relief was warranted other than dismissing the cross-claims with a costs order against it because no relevant liability had "crystallised". In rejecting this submission, her Honour noted that the reason for seeking what she described as a "seemingly illogical result" was not foreshadowed before Davies J: Relief Judgment at [25].
2. Her Honour also rejected XL's contention that its submission as to final relief involved no inconsistency with its position in seeking a determination of the separate questions. Her Honour found that the orders sought by XL did not reflect the defendants' success on the only issue between them and XL on the cross-claims and that such relief was not precluded by what was decided at first instance in AMP Financial Planning Pty Ltd v CGU Insurance Limited (No 2) [2004] FCA 1397 (AMP Financial Planning Pty Ltd v CGU Insurance Limited (No 2)): Relief Judgment at [26].
3. Her Honour concluded that, having failed on the matter that XL put in issue by its pleaded case, the appropriate order given the dictates of s 56 of the Civil Procedure Act 2005 (NSW) is one which reflects the defendants' success on that issue and the role which XL played in the litigation: Relief Judgment at [29]-[30].

Issues on appeal

1. XL asserts various errors by the primary judge in her approach to the construction of exclusion (ix) (grounds 1-4). XL contends that the proper construction of exclusion (ix) is that the exclusion operates to exclude cover for "Loss" as defined in the policy where the valuation is of a particular kind, namely, valuations undertaken for lenders who are not an ADI and which do not include a prudent lender clause (grounds 5, 7 and 8).
2. Ground 6 asserts that the primary judge failed to give adequate reasons, but this ground was not the subject of specific submissions and may be taken not to have been pressed.
3. Ground 9 relates to relief, and assumes that the separate questions are resolved against XL. In that event, XL contends that it was not appropriate for the primary judge to grant declaratory and other final relief requiring XL to indemnify the defendants in circumstances which have not yet arisen, and which XL submits may never arise.

The parties' submissions on construction

1. In outline, the parties' essential contentions are as follows.

XL

1. XL submitted that the primary judge erred in her approach to construction by finding that exclusion (ix) was ambiguous without first determining the literal or grammatical meaning of the exclusion. Reference was made to Zhang v ROC Services (NSW) Pty Ltd (2016) 93 NSWLR 561; [2016] NSWCA 370 (Zhang v ROC Services) at [53]-[54]. XL complained that the substance of the ambiguity the subject of her Honour's finding was not identified.
2. XL submitted that the causal criteria in the chapeau of the Endorsement have a settled meaning and required XL to establish no more than an indirect causal connection between the subject matter of the exclusion (here, the undertaking of a valuation report by or on behalf of MMJ for a particular category of lender) and any "Loss" suffered by the Insureds. XL submitted that no ambiguity was introduced into exclusion (ix) by the "introductory words" in the Endorsement or their relationship to the subject matter of exclusion.
3. Turning to the meaning of the exclusion, XL submitted that the subject matter of exclusion (ix) is valuations of a particular kind, namely, valuations that have been undertaken for lenders who are not ADIs; that the subject matter is not defined by reference to any quality or characteristic of an error or omission by any of the Insureds; and that it is the identity of the ultimate client of the Insured, and the different risk profile which that client presents, is the mischief to which the exclusion is clearly directed.

The defendants and BNY

1. The defendants and BNY both sought to uphold her Honour's analysis by slightly different routes. The defendants submitted that it was unnecessary for her Honour to determine the literal or grammatical meaning of exclusion (ix) because no grammatical ambiguity arose.
2. The defendants further submitted that the effect of the causal criteria in the chapeau of the Endorsement "is that they would entitle XL to refuse to indemnify the Insured parties under the Policy if BNY's Loss was caused by their failure to insert a 'prudent lender clause' in the valuation".
3. BNY accepted that the literal meaning of the exclusion is that it identifies a characteristic which a valuation must have in order to engage the exclusion, whilst submitting that this meaning was "strict and pedantic", and productive of uncommercial results verging on the absurd, referring to the example which the primary judge accepted, where a valuation is undertaken both for a non-ADI lender and also for an ADI lender: see [25] above. BNY submitted that the ambiguity finding was justified because the exclusion is open to more than one meaning:
4. Even if exclusion (ix) is not ambiguous, both the defendants and BNY submitted that its legal meaning can only be that which her Honour determined.
5. The correct approach, BNY submitted, is to read all words of the exclusion as a composite whole for the purposes of identifying what caused the "Loss" and hence what engages the exclusion. On this approach, the submission continued, the required causal connection in relation to exclusion (ix) is that the "Loss" is caused by the absence of the prudent lending clause in the valuation.
6. BNY submitted that the focus on the valuer's conduct for the purposes of causation of loss makes sense for a policy of professional indemnity insurance and regard must be had not just to the valuer's act of undertaking the valuation for the non-ADI lender, but also the valuer's failure to include a prudent lending clause in the valuation.
7. BNY further submitted that the construction given by the primary judge is consistent with the evident commercial purpose of the exclusion, namely, to avoid the vice of XL having to cover a liability which the valuer has incurred to a lender which did not act prudently when making the loan in reliance on the valuation.
8. As a fall-back position, both the defendants and BNY placed reliance to the contra proferentem rule. BNY submitted that it should be inferred that XL had put forward the wording of the Endorsement, because XL's logo appeared on the document.

A: Determination of the construction issue

1. As the policy is a commercial contract, the Court should, in construing it, "ask what a reasonable businessperson would have understood [the relevant] terms to mean": Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 (Electricity Generation) at [35]. The task is an objective one; it involves identifying the imputed intention of the parties, by reference to the contractual text construed in the light of its context and purpose: Electricity Generation at [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 (Mount Bruce) at [46]-[51] and [108]-[109]; Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392 at [51]-[75]; Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47; (2016) 91 ALJR 108 at [18].
2. Importantly, in their joint judgment in Mount Bruce, French CJ, Nettle and Gordon JJ said (at [48]) that: Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning. (Footnote omitted) Their Honours also emphasised that "context" may be discerned from the entire text of the contract in question: at [46].

The primary judge's approach to the construction issue

1. Grounds 1-4 assert specific errors in aspects of her Honour's reasons in answering the separate questions on the construction issue. However, given that a contract has only one true construction, the task of an appellate court in an appeal concerning the construction of a contract is to determine for itself the correct construction of the contract: Life Insurance Company of Australia Ltd v Phillips (1925) 36 CLR 60 at 78-79; [1925] HCA 18 (Issacs J); Minister for Immigration and Border Protection v SZVFW [2018] HCA 30; (2018) 92 ALJR 713 at [154].
2. Much of XL's argument on construction was directed to attacking the finding that the introductory words of the Endorsement were ambiguous. However, it is not entirely clear from her Honour's reasons what was actually intended by this finding. The finding was not relied upon for the admission of extrinsic evidence to assist in construing the provision.
3. It has been said that "ambiguity" is a word of ambiguous reference: Allstate Explorations NL v Beaconsfield Gold NL [1999] NSWSC 832 at [42] (Santow J). That comment is similar to the much earlier remarks of Isaacs J in Life Insurance Company of Australia Ltd v Phillips at 78 that the term "ambiguity" is itself not inflexible. Isaacs J continued at 78: It may arise from doubt as to the construction in their totality of the ordinary and in themselves well-understood English words the parties have employed. That is true construction.
4. In Burns Philp Hardware Ltd v Howard Chia Pty Ltd (1987) 8 NSWLR 642 (Burns Philp) at 657, Priestley JA said with reference to specific words in a rent review clause that ambiguous meant "having two or more plausible meanings when the context of the words in the document is taken into account in the light of the knowledge any ordinary intelligent reader of the document would bring to the meaning of it". (The latter reference to "any ordinary intelligent reader" should be understood in the present context as a reference to "a reasonable business person".)
5. Whether or not her Honour's ambiguity finding was intended in this sense, the real difficulty with her Honour's analysis is that she did not squarely address the meaning of exclusion (ix) in the context of the Endorsement in the policy and the usual canons of construction. Of course, the canons of construction provide a starting point, or preference, not an absolute rule. As Sir Kim Lewison and Mr David Hughes, the authors of The Interpretation of Contracts in Australia (2012, Lawbook Co), observed at 346 by reference to the above mentioned statement of Priestley JA in Burns Philp: Ambiguity, understood in this sense, can only arise where after ascertaining the meaning of the words used, and after applying all the usual canons of construction, the instrument still conveys a double or multiple meaning. Ambiguity of this type is sometimes contrasted with words whose meaning is difficult to construe. Thus, in L Schuler AC v Wickman Machine Tool Sales Ltd [1974] AC 235 at 261, approved in State Lotteries Office v Burgin (unreported, NSW Court of Appeal, Kirby P, Meagher and Sheller JJA, 19 May 1993), p 6, Lord Wilberforce said that 'ambiguity … is not to be equated with difficulty of construction, even difficulty to a point where judicial opinion as to meaning has differed'.
6. Further, whether or not the introductory words of the Endorsement are ambiguous in this sense, it is necessary, in any case of construction of a commercial contract, to test the competing constructions against text, context and purpose. As Leeming JA (McColl JA and Emmett AJA agreeing) said in MetLife Insurance Ltd v RGA Reinsurance Company of Australia Ltd [2017] NSWCA 56 at [100]-[101]: [100] It is necessary, in any case of construction of a commercial contract, to test both competing constructions against text, context and purpose. The process was stated by the High Court in Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; [2005] HCA 17 at [16]: "preference is given to a construction supplying a congruent operation to the various components of the whole". [101] More recently, Lords Neuberger and Mance have described the iterative process of "checking each of the rival meanings against the other provisions of the document and investigating its commercial consequences": Re Sigma Finance Corp (in administrative receivership) [2009] UKSC 2; [2010] 1 All ER 571 at [12]; Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900 at [28].
7. When this is done in the present case, in my view, the preferred construction is that exclusion (ix) applies to exclude cover for "Loss" as defined in the policy where the valuation is undertaken by or on behalf of the Insured for a non-ADI lender and the valuation does not include a prudent lender clause. In summary, my reasons are as follows.
8. First, the subject matter of exclusion (ix) is valuations of a certain kind, specifically for a certain category of lenders - non-ADI lenders - subject to one qualification relating to the inclusion of a prudent lender clause in such valuations.
9. Second, the evident purpose of the exclusion is to guard against the different risk profile which a non-ADI lender presents. It does so by excluding the perils associated with valuations for non-ADI lenders, subject to one qualification.
10. Third, the causal criteria in the introductory words of the Endorsement do not alter the natural meaning of the words used in the exclusion when read together with those introductory words.
11. Fourth, this construction avoids construing the exclusion in a manner that renders a provision or part of a contract superfluous. The reluctance to do so is heightened in this case as the terms of the Endorsement were drafted specifically for the policy for valuers.
12. Fifth, this construction has the attraction of providing commercial certainty to the parties because the operation of the exclusion for valuations undertaken for non-ADI lenders may be readily applied on the face of the valuation. It does not give rise to commercial inconvenience by subjecting the operation of the exclusion to the need for a causal inquiry as to the nexus between the absence of a prudent lender clause in the valuation and the loss suffered by the non-ADI lender.

The Endorsement

1. It is of assistance to first outline the structure of the Endorsement. The Endorsement provides thirteen exclusions from the scope of cover in a policy providing professional indemnity insurance to a property valuer, in addition to the general exclusions provided in cl 5 of the Policy Wording.
2. The introductory words "directly or indirectly arising out of, based upon, attributable to or in consequence of" postulate a causal relationship between the subject matter of the clauses that follow and the "Loss" the subject of the claim for indemnity. The words require that there be some causal connection between the "Loss" the subject of the claim for indemnity and the specified matters, but the required nexus is less than a direct or proximate relationship as required by the words "caused by": Government Insurance Office (NSW) v RJ Green & Lloyd Pty Ltd (1966) 114 CLR 437 at 447 (Windeyer J); [1966] HCA 6; Dickinson v The Motor Vehicle Insurance Trust (1987) 163 CLR 500 at 505; [1987] HCA 49; McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579; [2000] HCA 65 at [195]-[197] (Callinan J); Quintano v B W Rose Pty Ltd [2008] NSWSC 793 at [7] (Brereton J); Ashmere Cove Pty Ltd v Beekink [2009] FCA 564 at [110] (Barker J).
3. The subject matter of the exclusions takes various forms. For example, exclusion (ii) is concerned with particular conduct of the Insured with respect to tangible property of the claimant, relevantly, the physical injury or destruction of tangible property held by the Insured or any agent in their care, custody or control. Other exclusions focus on the kind of valuation undertaken by the Insured valuer. By way of example:

• Exclusion (viii) is concerned with valuations by reference to the kind of lender, relevantly, any solicitors' mortgage facility (other than a mortgage facility that is registered as a Managed Investment Scheme pursuant to the provisions of the Managed Investments Act 1998) or any solicitor-arranged loan or mortgage.
• Exclusion (x) is concerned with valuations in connection with particular types of managed investment schemes, relevantly, schemes which promote or offer tax benefits (including tax minimisation) to investors, or a scheme involved in any direct or indirect investment in primary production.
• Exclusion (xi) is concerned with valuations for the purpose of a mortgage, other than a first mortgage.

1. Turning to exclusion (ix), it is also concerned with the kind of valuation undertaken by the Insured valuer. The subject matter of this exclusion is valuations undertaken for lenders who are not an ADI. Importantly, the subject matter of this exclusion is not defined by reference to any quality or characteristic of an error or omission by the Insured.
2. In this case, no issue arises as to whether the concluding words of exclusion (ix) after the word "unless" are in the nature of an exemption to the exclusion clause, and whether the defendants have the onus of proof that the exemption applies: see generally, I Enright and R Merkin, Sutton on Insurance Law (4th ed, 2015, Law Book Co) at [10.310]. Given the agreed fact that the valuations issued by MMJ to BNY did not include a prudent lender clause, the sole issue in dispute on the cross-claims was whether XL has established that the valuations undertaken for BNY came within exclusion (ix) in the policy.

The grammatical meaning of exclusion (ix)

1. It has been said that the starting point with a complex commercial document must be the literal or grammatical meaning of the exclusion. It is then necessary to consider the legal meaning of the exclusion, and then apply the legal meaning to the facts, in this case, as agreed between the parties for the purpose of determination of the separate questions: Zhang v ROC Services at [53]-[54] (Leeming JA, Macfarlan JA and Sackville AJA agreeing, although Macfarlan JA dissented in the result).
2. Applying this approach, there is no grammatical ambiguity in the language of exclusion (ix). The exclusion specifies valuations prepared for a non-ADI lender, and then exempts such valuations if the valuation includes a prudent lender clause. That is, the concluding words after the word "unless" serve to qualify the description of the kind of valuations for a non-ADI lender to which the exclusion applies. These words narrow the scope of the exclusion. The language of the qualification does not impose any causal relationship between the absence of a prudent lender clause in a valuation and the "Loss".

The legal meaning of exclusion (ix)

1. When the competing constructions advanced by the parties are tested against text, context and purpose, the difficulties with the construction preferred by her Honour become apparent.
2. First, her Honour's preferred construction involves a significant gloss on the language of the Endorsement, since the causal relationship required by the introductory words is not a direct or proximate relationship, such as if the words "caused by" had been used: see [62] above. By characterising the introductory words of the Endorsement as being concerned with losses caused by the specified matter dealt with in the clauses that follow, her Honour was diverted from analysing the required causal nexus between the specified matter and the "Loss".
3. Once it is accepted, as it should be, that an indirect causal relationship between the specified matter and the "Loss" is sufficient to engage the exclusions, including exclusion (ix), it is difficult to detect any ambiguity in exclusion (ix) arising from the introductory words of the Endorsement.
4. Second, the construction rendered much of the first three lines of the provision superfluous. The effect was to alter the subject matter of the exclusion to valuations for a non-ADI lender where the absence of a prudent lender clause in the valuation is a cause of the Loss. That is not the natural meaning of the exclusion.
5. The applicable principles with respect to redundancy of words in a contract were summarised by Ball J in AFC Holdings Pty Ltd v Shiprock Holdings Pty Ltd [2010] NSWSC 985; (2010) 15 BPR 28,199 at [13], as follows: The general principle is that the words of a contract should be interpreted in a way which gives them an effect rather than a way in which makes them redundant: North v Marina [2003] NSWSC 64 at [45]; Davuro Pty Ltd v Wilkins [2000] FCA 1902, (2000) 105 FCR 476 at [152], [230]. That principle does not operate as an invariable rule. In some cases, it may be appropriate to interpret words in a way that makes them redundant. That may be appropriate where the alternative construction of the words is inconsistent with other provisions of the contract or where the alternative construction is inconsistent with the commercial purpose of the contract or where it appears that the words have been included out of abundant caution: see Re Strand Music Hall Co Ltd; Ex parte European and American Finance Co Ltd (1865) 35 Beav 153 at 159; 55 ER 853 at 856 per Sir John Romilly MR; Dryden Construction Co Ltd v New Zealand Insurance Co Ltd [1959] NZLR 1336; Beaufort Developments (NI) Ltd v GilbertAsh NI Ltd [1999] 1 AC 266 at 273-4 per Lord Hoffmann
6. None of those exceptions apply in this case. The Endorsement which contained exclusion (ix) was drawn for professional indemnity policies for valuers. So much appears from the title of the Endorsement and its subject matter. Plainly, the purpose of the Endorsement is to supplement the standard terms of the policy. The alternative construction advanced by XL is not inconsistent with other provisions of the policy, in particular the introductory words to the Endorsement, to which her Honour referred. This is addressed at [80]-[89] below. The alternative construction is not inconsistent with the commercial purpose of exclusion (ix) which is to guard against the different risk profiles which a valuations for non-ADI lenders presents: see [57] above. Nor does it appear that the words used to describe the specified matter in exclusion (ix) were included out of abundant caution.
7. Third, the construction gives rise to commercial inconvenience given the need for a causal inquiry as to the nexus between the absence of a prudent lender clause in the valuation and the loss suffered by the non-ADI lender. That seems an unlikely intention of the parties to the policy. A more likely intention of the parties is that they sought by the words of the Endorsement to secure commercial certainty. In this respect, the alternative construction advanced by XL has the attraction that the situation in which cover is not available to the Insured by reason of exclusion (ix) may be readily ascertained by reference to two matters on the face of the valuation: the kind of lender and the absence of a prudent lender clause.
8. Fourth, BNY characterised the purpose of exclusion (ix) as follows: Exclusion (ix) is not concerned with the identity of the lender per se. It is directed to ensuring that the valuer is only exposed to liabilities to lenders which have acted prudently when making the loan.
9. The difficulty with this submission is that the purpose suggested by BNY as that contemplated by the parties of the policy is unsupported by evidence. In Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407, Allsop P (Giles JA agreeing) after citing at [19] the remarks of Gleeson CJ, Gummow and Hayne JJ in Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181; [2010] HCA 70 at [43] as to "business common-sense" being a topic upon which minds may differ, said at [20]: It may be, as here, that there is a real contest about the appropriate commercial perspective to take from the surrounding circumstances. This may be a function of contested evidence ...
10. There is no evidence in this case that the parties intended that the excluded peril was exposure of valuers to liabilities to lenders which have not acted prudently in making the loan. The excluded peril was exposure of valuers to a particular category of lenders, subject to one exception - where the valuation undertaken for a non-ADI lender included a prudent lender clause.
11. Fifth, the construction relies upon assertions of "commercially unlikely consequences" as a reason for departing from the language the parties have in fact used: see the three reasons given by her Honour referred to at [24]-[26] above. But as Bell P emphasised in Donau Pty Ltd v ASC AWD Shipbuilder Pty Ltd [2019] NSWCA 185 at [58], caution is required when resort is had to assertions of "commercially unlikely consequences" as a reason for departing from the language the parties have in fact used. His Honour cited: Jireh International Pty Ltd t/as Gloria Jean's Coffee v Western Exports Services Inc [2011] NSWCA 137 at [55]; Cushman & Wakefield (NSW) Pty Ltd v Farrell [2017] NSWCA 24 at [71]; Lindsay-Owen v Winton Partners Funds Management Pty Ltd [2017] NSWCA 78 at [20].
12. Bell P continued at [58]: … "Business commonsense" is also a topic upon which minds may differ, and what a lawyer may surmise to amount to business commonsense may be far removed from the true position, whether because of a general lack of understanding of commerce, or because of an information deficit as to the commercial positions of both parties and their larger commercial concerns. Indeed, as Spigelman CJ observed writing extra-judicially, "when the matter comes to the level of litigation, each party remains convinced that 'a business like' interpretation or 'business commonsense' happens to coincide with its own commercial interests": "From Text to Context: Contemporary Contractual Interpretation" (2007) 81 ALJ 322 at 330.
13. These remarks have particular significance in this case.

(1) The requirements of previous insurance policies

1. Her Honour reasoned that it could not have been intended by the parties to the policy that MMJ be "required" to include a prudent lender clause in a valuation provided to a non-ADI lender when it had not been required to do so in the past and where claims may be made in the policy period arising out of valuations pre-dating the negotiation of the policy terms.
2. XL correctly points out that there is no evidentiary basis for the premise of this reasoning based as it is on what was contained in previous policies providing claims-made cover to MMJ and the fact that the three valuations issued by MMJ to BNY in December 2010 did not include a prudent lender clause. So much seems to have been correctly accepted by her Honour. At Judgment [34], her Honour observed that the evidence did not establish what the defendant's insurance cover may have previously required, if anything, so far as the subject matter there dealt with is concerned. However, her Honour went on to say at Judgment [35]: It follows, nevertheless, that if the insurer's construction of clause (ix) is correct, the parties had in contemplation that claims in respect of any valuations predating the insurance cover which they agreed in 2016, which did not include a clause of the kind specified in clause (ix), which would otherwise undoubtedly be covered by the policy, would be excluded, even when the absence of such a clause was neither the required or causally connected with the loss in question.
3. Whatever insurance arrangements MMJ had made for previous years, the parties agreed with respect to the 2016/2017 Policy Period that any valuations undertaken for a non-ADI lender, including such valuations undertaken before the Policy Period, were excluded from the scope of cover by exclusion (ix), unless the valuation contained a prudent lender clause.
4. In addition, it is not to the point whether any previous claims-made policy issued to MMJ did not contain an exclusion of the kind in exclusion (ix). That is not a relevant reason for not giving effect to the natural meaning of exclusion (ix), which reflects the bargain the parties have made.

(2) Valuations for ADI and non-ADI lenders

1. Contrary to her Honour's view, it does not follow from the language of exclusion (ix) that on XL's construction the clause would operate to exclude from the scope of cover a valuation undertaken for an ADI lender, where the valuation is also undertaken for a non-ADI lender and does not include a prudent lender clause.
2. Exclusion (ix) is not concerned with valuations undertaken for an ADI lender. Given that it is not the purpose of the exclusion to guard against "Loss" arising out of a claim against the Insured by an ADI lender, the exclusion should be given a distributive effect where a valuation is undertaken for both an ADI lender and a non-ADI lender by limiting the exclusion to such valuations insofar as the valuation is undertaken for a non-ADI lender. That follows from the description of the kind of valuations the subject of exclusion (ix), which is confined to valuations for non-ADI lenders.

(3) Exclusion (vii)(c)

1. The tension in exclusion (vii)(c) which her Honour identified between the position of an addressee and third party to a valuation report is answered by considering the text of sub-par (c) in the light of its context and purpose. Exclusion (vii), the terms of which are set out at [18] above, is concerned with ensuring best valuation practice by the Insured. The exclusion specifies particular standards of conduct to be attained by the Insured in undertaking a valuation. Sub-par (c) specifies any valuation where the Insured fails to append a disclaimer limiting responsibility for reliance on the report to the addressee.
2. Her Honour considered that it was exceedingly unlikely for the parties to have agreed that there was no causal requirement between the "Loss" and the absence of a written disclaimer to the valuation report. Her Honour reasoned, that on XL's approach, not only would the absence of the disclaimer exclude liability for someone else who had relied on the valuation, it would also exclude liability for the addressee to whom the valuation was provided: Judgment at [50]. I do not agree.
3. The evident purpose of sub-par (c) is to exclude from the scope of cover, claims made against the valuer by non-addressees of the valuation report. The alternative construction of sub-par (c) is that it does not operate to exclude valuations undertaken by the Insured for an addressee of a valuation report. That is, in the context of sub-par (c), the reference to a "valuation" undertaken by the Insured is to be understood as valuations where a non-addressee of the valuation report makes a claim against the valuer.
4. Where the language is open to two constructions, preference will be given to a construction that avoids consequences which appear to be "capricious, unreasonable, inconvenient or unjust, 'even though the construction adopted is not the most obvious, or the most grammatically accurate'": Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109 (Gibbs J); [1973] HCA 36. Application of this principle in this case would favour the alternative construction of exclusion (vii)(c) identified above.
5. It remains to consider the two other reasons given by her Honour.

The significance of other exclusions - Exclusion (v)(a)

1. The subject matter of exclusion (v)(a), which is also set out at [18] above, is the qualifications of the persons performing the valuations. The evident purpose of this exclusion is to guard against valuations performed by unqualified persons.
2. Whilst her Honour found that this exclusion did not support the defendant's case, she also found that it supported her conclusion of ambiguity in the introductory words of the Endorsement: Judgment at [56]. Her Honour continued by observing that exclusion (v)(a) is concerned with what causes a loss referring to the introductory words used in this exclusion: "The loss is caused by …": Judgment at [58].
3. The essential difficulty with the latter finding is that her Honour's reasons are premised upon an unfortunate error at Judgment at [55], when reproducing the terms of exclusion (v)(a) as containing the additional words highlighted below: The loss is caused by any valuation undertaken by or on behalf of the insured by any person who at the time the valuation was performed was not a member of the Australian property Institute or the Royal Institute of Chartered Surveyors. (Emphasis added)
4. In this Court, the defendants and BNY correctly acknowledged this error. It is appropriate to note that the source of the error seems to have been a summary of the terms of exclusion (v)(a) given by counsel for BNY in oral argument. When the erroneous words are removed, it is plain that in specifying valuations prepared by persons lacking certain qualifications, the exclusion does not require a causal relationship between the absence of the specified qualifications and the "Loss"; the relevant causal relationship, which only needs to be indirect, is between a valuation answering the specified description and the "Loss".
5. Her Honour's reasoning that there is an analogous ambiguity in exclusion (v)(a) cannot stand, as it is based on an incorrect statement of the terms of the exclusion.

Concession as to causation

1. Her Honour found that XL's admission, for the purposes of the separate questions that the loss the subject of BNY's claim against the defendants was not caused by their failure to incorporate a prudent lender clause in the valuations, "supports the conclusion that the construction for which the defendants contend is correct": Judgment at [60]. I do not agree.
2. The significance of XL's admission in the agreed facts was simply to remove the question of causation as a factual issue for the determination of separate questions. That is made plain from the reasons given by Davies J when ordering the separate questions: [2018] NSWSC 1052 at [24].
3. As XL correctly submitted, the concession provided no basis for concluding that the separate questions should be resolved one way, rather than the other. Her Honour erred in taking this concession into account on the construction issue.
4. One further matter should be mentioned.
5. There was some debate in oral argument as to whether the construction determined by her Honour was unlikely to have been intended by the parties, because it was inconceivable that the absence of a prudent lender clause could cause Loss as defined in the policy. Counsel for XL submitted that no example had been identified and this supported XL's preferred construction.
6. Counsel for BNY responded by suggesting that the absence of a prudent lender clause in a valuation may have significance for the existence of a duty of care or the measure of loss, the scope of liability with respect to causation under s 5D of the Civil Liability Act 2002 (NSW), the question of remoteness or the question of reliance in the context of misleading or deceptive conduct claims.
7. It is not necessary to address the examples suggested by BNY, which seemed to me to be somewhat strained. Even if it be assumed that a case could be conceived where the Loss arises out of the failure of the valuer to include a prudent lender clause in the valuation for a non-ADI lender, I do not regard such a possibility as altering the clear and unambiguous meaning of exclusion (ix), considered in light of its context and purpose.

Contra proferentem

1. As a fallback position and assuming exclusion (ix) is ambiguous, both the defendants and BNY sought to rely upon the contra proferentem rule, asserting that XL had put forward the wording of the Endorsement, including exclusion (ix). The primary judge did not rely upon this rule in arriving at her conclusion on construction.
2. It is common ground that the correct principles to apply are those stated in Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510; [1986] HCA 82: … [T]he interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity.
3. Outside the special area of contracts of guarantee, the rule is one of last resort: Zhang v ROC Services at [140], citing among others, the remarks of Bathurst CJ in Beefeater Sales International Pty Ltd v MIS Funding No 1 Pty Ltd [2016] NSWCA 217 at [66], that the rule would "apply only when ambiguity remains after all other avenues of construction have been exhausted".
4. XL submitted that this is not a case which calls for the application of the rule. I agree. After ascertaining the literal or grammatical meanings and evaluating them against the text, context and purpose of the contract, this is not a case where there is still a real doubt as to the meaning of the exclusion: Zhang v ROC Services at [140].
5. In these circumstances, it is not necessary to determine XL's alternative submission that this Court should not draw the inference that XL put forward the wording of the Endorsement to the policy, simply on the basis that its logo appeared on the policy documents. Were it necessary to decide this point, my view is that there is much force in XL's submission that such an inference should not be drawn. This is because there was no agreed fact and no evidence was adduced in relation to the identity of the party (if any) who proffered the policy.

Conclusion on construction

1. The correct construction of exclusion (ix) is that it applies to exclude cover for "Loss" as defined in the policy where the valuation is undertaken by or on behalf of the Insured for a non-ADI lender and the valuation does not include a prudent lender clause.
2. On the agreed facts, the three valuations undertaken by MMJ for BNY answered that description. It follows that XL is entitled to rely upon exclusion (ix) to deny indemnity to the defendants and to refuse to pay their defence costs of the proceedings. Accordingly, the separate questions should be answered "Yes".

B. Whether the grant of final relief was appropriate?

1. The declaration and final order made by her Honour are in the following terms: 2. A declaration that XL is liable in accordance with the terms and conditions of the Policy to indemnify each of MMJ, Volk and Hosking in respect of any liability it or he has to the Plaintiff in the proceeding. 3. XL indemnify in accordance with the terms and conditions of the Policy each of MMJ, Volk and Hosking against any amount found to be due by it or him to the Plaintiff in the proceeding.
2. The essential complaint made by XL is that it was not appropriate to make a declaration concerning XL's liability to indemnify the defendants against the liability that they may or may not be found to have in the future. That is, it was not appropriate to grant such final relief in relation to the cross-claims as such relief was in substance hypothetical.
3. In light of the determination of the construction issue, it is not necessary to decide this issue. However, given the general importance of this issue, some brief observations should be made.
4. Courts will usually not make a declaration as to the liability of an insurer to indemnify an insured in circumstances where the liability of the insured to a claimant has not yet been established by judgment: AMP Financial Planning Pty Ltd v CGU Insurance Limited (No 2) at [4]-[12] (Heerey J). This is because the power to make a declaration should not be directed to answering hypothetical questions: University of New South Wales v Moorhouse (1975) 133 CLR 1 at 10; [1975] HCA 26; Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 582; [1992] HCA 10; AMP Fire & General Insurance Co Ltd v Dixon [1982] VR 833 at 839-840.
5. In the present case, the declaration was too wide. The words "liable in accordance with the terms and conditions of the Policy to indemnify" did not provide sufficient certainty as to what had been determined by the separate questions. Difficulties could arise if subsequent events or the discovery of new material provided XL with another basis for denying indemnity.
6. The proper basis for any declaration is to be found in the agreed facts and the answers to the separate questions. If, in addition to answering the separate questions, a declaration was considered appropriate, it would have been better expressed in negative terms, moulded to reflect the answers to the separate questions.
7. Without intending to be prescriptive, the declaration might have been expressed in terms that, upon the proper construction of the policy comprised in the documents referred to in the agreed facts and in the circumstances which have happened, XL is not entitled to decline to indemnify the defendants and refuse to pay their defence costs in relation to BNY's claim against them by reason of the operation of cl (ix) of Endorsement 1 to the policy.

Conclusion and orders

1. XL has succeeded on appeal. The separate questions should be answered in the affirmative. The defendants did not submit that there is any other basis on which they are entitled to the relief sought in their respective cross-claims. It follows that the cross-claims should be dismissed.
2. As to costs of the appeal, there is no reason why costs should not follow the event: Uniform Civil Procedure Rules 2005 (NSW), r 42.1. Nor was any reason advanced as to why the costs of the cross-claims, including the separate hearing below, should not follow the event.
3. I propose the following orders: 1. Appeal allowed. 2. Set aside orders 1-8 made by Schmidt J on 14 February 2019, and in place, order that: 1. In relation to each of the first, second and third cross-claims, the separate questions the subject of orders made by Davies J on 13 July 2018, are both answered: "Yes"; 2. Each of the first, second and third cross-claims is dismissed; 3. The respective cross-claimants to the first, second and third cross-claims are to pay the cross-defendant's costs of such cross-claims, including the costs of and incidental to the application heard by Davies J on 26 June 2018. 1. The respondents to pay the appellant's costs in this Court.
4. EMMETT AJA: This appeal concerns the construction of an endorsement providing an exclusion in a professional indemnity insurance policy (the Policy) issued by the appellant, XL Insurance Company SE (the Insurer). The named insured under the Policy is the second respondent, MMJ Real Estate (WA) Pty Ltd (MMJ). The "Insured" under the Policy includes MMJ, together with any principal of MMJ and any employee of MMJ. The third respondent, Mr Dennis Volk, is a principal of MMJ and the fourth respondent, Mr Brett Hosking, is an employee of MMJ.
5. By the Policy, the Insurer agreed to indemnify the Insured against legal liability arising from any civil cause of action for any compensatory damages or claimant's costs incurred by the Insured in respect of any legal proceedings or demand against the Insured for compensation first made against the Insured and notified to the Insurer during the period from 4pm on 30 June 2016 to 4pm 30 June 2017 arising from the performance of real estate agency services, property valuation services, property management services and project management services by or on behalf of MMJ. However, endorsement 1 (the Endorsement), which forms part of the Policy, relevantly provided that the Insurer would not be liable to indemnify the Insured for any loss arising out of, based upon, attributable to, or in consequence of any valuation undertaken by or on behalf of the Insured for any provider of financial security that is not an "Authorised Deposit-Taking Institution" unless a clause described as a "prudent lender clause" is included in any such valuation report. The prudent lender clause is as follows: This valuation is prepared on the assumption that the lender as referred to in the valuation report (and no other) may rely on the valuation for mortgage finance purposes and the lender has complied with its own lending guidelines as well as prudent finance industry lending practices, and has considered all prudent aspects of credit risk for any potential borrower, including the borrower's liability to service and repay any mortgage loan. Further, the valuation is prepared on the assumption that the lender is providing mortgage financing at a conservative and prudent loan to value ratio.
6. The first respondent, BNY Trust Company of Australia Limited (BNY) retained MMJ to provide valuations in relation to loan agreements proposed to be entered into between BNY, as lender, and Leigh Kennedy and Wayne Houghton, as borrowers, under letters dated 30 November 2010 and 1 December 2010 respectively. BNY is not and has never been an Authorised Deposit-Taking Institution within the meaning of the Endorsement.
7. On 9 December 2010, MMJ produced valuation reports in respect of properties situated at Rockingham, Western Australia, which were owned respectively by Mr Kennedy and Mr Houghton. Both valuations were prepared and signed on behalf of MMJ by Mr Hosking and reviewed and countersigned by Mr Volk.
8. On 20 October 2016, BNY commenced proceedings against MMJ, Mr Volk and Mr Hosking and in early November 2016, MMJ gave notice of the proceedings to the Insurer. In the proceedings, BNY alleges that, in breach of MMJ's retainer by BNY and of the duty of care owed by MMJ, Mr Volk and Mr Hosking, MMJ, Mr Volk and Mr Hosking failed to exercise the care and skill of a reasonably competent property valuer. By cross claims against the Insurer, BNY, Mr Volk and Mr Hosking claimed declarations that the Insurer is liable to indemnify them in respect of any liability that they have to BNY. In its defences to the cross claims the Insurer, in answer to the whole of the cross claims, relies upon the Endorsement.
9. On 13 July 2018, for reasons published on that day , Davies J ordered that certain matters be determined separately from, and prior to, the final hearing of proceedings brought by BNY and the cross claims. The matters were whether the Insurer is entitled to decline to indemnify MMJ, Mr Volk and Mr Hosking under the Policy for any loss incurred by them in respect of BNY's claim against them in the proceedings by reason of the operation of the Endorsement. On 14 February 2019, for reasons published on 14 December 2018, a judge of the Common Law Division (the primary judge) concluded that the answer to the preliminary question was "no" and declared that the Insurer is liable in accordance with the terms and conditions of the Policy to indemnify each of MMJ, Mr Volk and Mr Hosking in respect of any liability it or he has to BNY in the proceedings and ordered the Insurer to indemnify each of them MMJ, Mr Volk and Mr Hosking against any amount found to be due by it or him to BNY in the proceedings, in accordance with the terms and conditions of the Policy.
10. By notice of appeal filed on 20 February 2019, the Insurer appeals against the orders made by the primary judge. To the extent that leave is required because the orders made on 14 December 2018 are interlocutory, leave should be granted.
11. The question before the Court is a straight forward one of construction. The words of the Endorsement are clear. Thus, the Insurer is not liable to indemnify the Insured for any loss arising out of, based upon, attributable to or in consequence of any valuation undertaken by the Insured for any provider of financial security unless that provider is an Authorised Deposit-Taking Institution or the prudent lender clause is included in any such valuation report.
12. The primary judge recorded that the following facts were not in issue: • BNY was not and never has been an Authorised Deposit-Taking Institution; • The valuations were prepared for BNY, Commonwealth Bank of Australia and Think Tank Group Limited. Think Tank Group Limited is not an Authorised Deposit-Taking Institution. However, Commonwealth Bank of Australia is an Authorised Deposit-Taking Institution; • The valuation reports did not include the prudent lender clause; • The loss that is the subject of the claim by BNY was not caused by the absence of the prudent lender clause from the valuation reports; and • But for the absence of the prudent lender clause in the valuations, the loss claimed by BNY was covered by the Policy.
13. The primary judge characterised the issue as being whether the Endorsement was to be construed as only entitling the Insurer to decline indemnity if it was the absence of the prudent lender clause in the valuation report that caused loss to BNY. Her Honour observed that both BNY and the Insurer contended that the language of the Endorsement was not ambiguous. BNY, together with MMJ, Mr Volk and Mr Hosking, contended that the Endorsement only excluded liability when the absence of the prudent lender clause, from a valuation provided to a lender that was not an Authorised Deposit-Taking Institution, caused the loss. Her Honour concluded that the words of the Endorsement were ambiguous and was satisfied that on the proper construction of the Endorsement, it was required that there be a causal link between the absence of the prudent lender clause and the loss in respect of which indemnity was claimed by the Insured. Her Honour was satisfied that that construction avoided consequences that her Honour characterised as being "so irrational and unjust" that it was unlikely that they were intended "by these commercial parties". Her Honour concluded that, in the circumstances, the potential consequences of the construction of the Endorsement contended for by the Insurer made it unlikely that that was in the contemplation of the parties when the Policy was entered into.
14. Considerable store was placed on the proposition that an anomalous result would ensue if a valuation was undertaken by the Insured for two providers of financial security, one of which was an Authorised Deposit-Taking Institution and the other one of which was not an Authorised Deposit-Taking Institution, as was the case in question. That is to say, the loans on the security of the properties valued by MMJ were provided by a syndicate consisting of two providers who were not Authorised Deposit-Taking Institutions and one provider which was an Authorised Deposit-Taking Institution. It was said to be anomalous that, in those circumstances, not even a claim by the Commonwealth Bank, an Authorised Deposit-Taking Institution, would be covered by the Policy.
15. The real difficulty for MMJ, Mr Volk and Mr Hosking is in formulating the way in which the Endorsement should be read without including words that do not appear or by excluding words that appear in the endorsement.
16. I have had the advantage of reading in draft form the proposed reasons of Gleeson JA for concluding that the appeal should be allowed. I agree with the orders proposed by his Honour for the reasons proposed by him.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 02 September 2019